GST is a single tax that is applicable on a taxpayer to prevent the multiplicity of taxes and the burden associated with complying with the different types of taxes. It was introduced to replace the old central and state taxes and the different types of taxes that had to be paid.
GST has been successful in liberating the sector from multiple levies like excise and VAT on manufacture/ procurement of goods (cement, steel, bricks, etc); service tax on construction, engineering, brokerage, architecture, etc. With GST replacing these taxes, there is only one tax that is required to be paid. GST brings transparency to the real estate sector and its various functions. It is to be noted that the overall increase in price for new residential properties is comparingly lower than that for new commercial properties.
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How do I avoid payment of GST on construction property?
Prospective buyers are finding ways in order to avoid the payment of GST, which is to be paid on the construction of flats. It can be seen that some builders have found a way to avoid the payment of GST.
Initially, the builder receives payment from the buyer in the form of a loan. When the OC is sanctioned, the builder then converts the loan amount procured from the buyer into the sale amount to avoid the GST charges. This is done because GST is charged on the under-construction property, and not for those properties which have already received the occupation certificate from the local authorities.
Thus, it can be seen that homebuyers of real estate properties will not have to pay GST if they purchase a fully constructed property after the issue of the completion certificate.
What is GST on the under-construction property?
The real estate sector is considered an important pillar of the economy. Under the earlier tax regime, various taxes like VAT, service tax, stamp duty, registration charges had to be paid by the buyers. However, under GST, a single rate of 5% is applicable to under-construction properties. No GST is applicable on completed or ready for sale properties, only if the competition certificate has been issued.
ITC benefit is not available under the new tax rate policy, which introduced the cut of the initial 12% which was charged as GST, to 5%. For properties that come under the categories of new affordable housing projects and ongoing affordable housing projects opting for new rates, the GST rate is 1%. For properties that fall in the categories of ongoing other than affordable housing projects, new other than affordable housing projects, projects with commercial space which is less than 15% of the total carpet area, the GST rate is calculated to be 5%.
Can we claim GST on construction?
Under the previous tax system that existed, developers were provided with ITC benefits. This allowed them to reduce the final GST payout. It allowed the developers to offset the taxes that have already been paid on inputs or any raw materials which have been procured such as cement, steel, paint, etc.
ITC (input credit tax) means that the reduction of taxes paid on input from those taxes that have been paid on output. It means reducing the amount of tax that has to be paid on output due to the fact of already paying tax paid on the inputs. When a person buys a product, taxes are paid on it. However, while selling the product, taxes are collected over it. The taxes that are paid at the time of buying the product is adjusted with the amount of tax that is collected during a sale, and the balance amount is paid to the government.
ITC for the construction of immovable property cannot be availed, except where the input service is used for further work contract services. This can be understood with the help of an example. XYZ Contractors are constructing an immovable property. They cannot claim any ITC on the works contract. However, XYZ hires ABC Contractors for a portion of the works contract. XYZ can claim ITC on the GST charged by ABC Contractors.
Is the sale of land taxable under GST?
It is seen that if a person wants to avoid the payment of GST on the sale of immovable property, it can be done so under only two conditions. One, the transaction should be a sale of flats/buildings after the occupation certificate and other certification is obtained from the local authorities, and the second is the sale of land. Apart from these two situations, every transaction related to the sale of immovable property has the application of GST on it.
GST is not applicable on the sale of land because it is neither treated as a supply of goods nor the supply of services as per Schedule III of the CGST Act, 2017. According to the provisions of the Act of 2017, Land is not levied with GST as it is considered and identified as immovable property. Only stamp duty is payable on the purchase of land.
However, if there is a sale of a developed plot of land, there will be GST charged upon it. This is because the sale of a developed plot is not the same as the sale of land, it is a different transaction. The sale of a developed plot of land can be classified as a rendering of a service.
GST applicable for landowners giving JDA to get flats
A joint development agreement (JDA) is a contract that is entered into between the builder and the landowner in order to build a development project over the land of the owner. After the implementation of GST, the Government notification with respect to the application of GST on landowners entering into a JDA in order to obtain flats is that after a landowner gives his land to a builder to construct a development project and receives a flat/constructed property in return, the landowner will have to pay tax over the property. This tax will be payable after signing the allotment letter. The rate of tax applicable over such transfer of property will be 18%
It can be seen that GST has undoubtedly helped in the formalization of the real estate sector to some extent. It is not advisable to avoid GST Registration and tax outside the tax net. It is also quite clear as to why the stakeholders like suppliers of building material, work contractors, etc should get themselves registered and avail benefit of input tax credits. Since a large majority of works carried out in the construction and real estate are sourced from unorganized segments, the benefit of availing input tax credit at each stage has encouraged them to come within the tax ambit.
Also, it was expected that removal of cascading effect of taxes (tax over tax), availability of additional input tax credits, and decreased logistic cost on account of reconfiguration of the supply chain under GST was expected to reduce overall construction cost.